No Laughing Matter

No Laughing Matter

Much of the commentary after Thursday’s veepstakes debate has focused on Vice President Joe Biden’s laughter. But during the spirited sit-down battle, Biden said deadly serious things about the economy, each of which deserves some attention. On housing, equity markets, and Big Finance, U.S. Representative Paul Ryan, running on the GOP ticket, could have used Biden’s seemingly offhand comments to remind the public that the Obama administration is indifferent, at best, to free-market solutions to our economic woes. Mitt Romney shouldn’t let any similar chances go to waste at next week’s town hall debate.

Moderator Martha Raddatz skimped on the economy in her questioning, letting the two candidates bicker over the weather in Afghanistan rather than querying them on housing policy, financial reform, or spurring new investments—yet Biden managed to highlight his opposition to the GOP on all three topics. On housing, Biden castigated the Romney-Ryan ticket, saying that in contrast to the Republicans, “we knew we had to act for the middle class. . . . We moved in and helped people refinance their homes. Governor Romney said, ‘No, let foreclosures hit the bottom.’” Ryan took a pass on this provocation, though it was an opening for him. He should have said: Yes, that is our position, and we’re proud of it because it worked. He could have asked: Would Obama and Biden prefer that home prices remain at unsustainable bubble-era levels, shutting young families who want to avoid a mountain of debt out of the marketplace?

Practically speaking, in the aftermath of the housing bubble, there was nowhere for house prices to go but down—way down. House prices have sunk for six long years, and on average, they’re finally at least flat or slowly inching their way up again. House prices have found their natural level despite the efforts of two presidents, Obama and George W. Bush, to entice buyers via tax credits and extra government guarantees on mortgages.

Free markets are more efficient in fixing their mistakes than Washington is—and ironically, the free-market solution is helping Obama now. People across the U.S. can perceive that the worst is over. It follows that they have a bit more confidence in the future, a change in psychology showing up in consumer-spending figures. Romney and Ryan should acknowledge that people feel better and explain why they do; it had nothing to do with the White House.

Ryan missed another opportunity with Biden’s remarks on Wall Street. The vice president accused the GOP of “having a different set of rules for Wall Street and Main Street.” He said that Democrats, by contrast, are “treating Main Street and Wall Street the same, hold[ing] them to the same responsibility.” If only: the Dodd-Frank financial reform law that Obama signed two summers ago specifically carves out “systemically important financial institutions” as exempt from the same rules by which every other company has to play.

In practice, this distinction creates new advantages and disadvantages. If you operate a small storefront business, it’s unlikely that you’ll ever get the Treasury and the FDIC to agree to protect your creditors and counterparties from the consequences of your failure to avoid a financial crisis. But Dodd-Frank allows for just that special treatment for large banks, insurers, and others. It’s the very definition of an unfair playing field. Here, too, just as with housing, broad markets, rather than a small group of people, are better at correcting errors—and Romney and Ryan should pledge to put in place the rules that let corrections happen.

Last, Biden made it clear that the administration isn’t concerned about encouraging investment outside of housing and finance. Attacking the GOP’s tax-reform plan, Biden said: “You think these guys are going to go out there and cut those loopholes? The loophole—the biggest loophole they take advantage of is the carried interest loophole and—and capital gains loophole.”

Biden was confusing different things. “Carried-interest” treatment for hedge funds and other partnerships is a complicated issue worth debating. Broader “capital gains” are something else entirely. Washington taxes the income gains from investments at 15 percent, rather than at the normal top income-tax rate of 35 percent, for several reasons. First, companies already pay taxes on their profits before sending what’s left over to investors as capital gains; the lower rate accounts for this double taxation. Second, people holding investments for a long time see some of their gains eroded by inflation; the lower tax rate accounts for this loss, albeit imperfectly. Third and most important, investors take considerable risk putting their money in the capital markets. Without special tax treatment, they may retreat to bond markets instead, preferring the sure thing of interest income, though they must pay higher taxes on such income.

In fact, the Socialist French government right now is backing away from a plan to double France’s capital-gains tax rate, not because millionaires and billionaires have complained, but because small-scale start-up entrepreneurs have objected. One instigator of an online protest, Jeremy Benmoussa, who runs two social-media start-ups, told the Financial Times that “We are being treated as ‘pigeons’. . . . We are different from the grands patrons on their big salaries. We work 24 hours a day and we need help. We need investors. If this new tax goes ahead it will be very difficult for new businesses to find investors.” Ryan should have said to Biden: You are proposing something that even France has decided is a bad idea. A good way to keep skittish investors away from the volatile American equity markets—and discourage them from financing new companies—would be to double their taxes.

Romney and Ryan have often asserted that they prefer free enterprise to what Romney called “trickle-down government” last week. But they tend to shy away from offering real-world examples of how free markets work—perhaps fearing that Americans are afraid of the truth on, say, housing policy. But Americans have already lived through the free-market truth about housing, and they’ve survived it. The Republican candidates should give them some credit for that experience and treat them like adults on other concrete economic issues, too.

Nicole Gelinas (@nicolegelinas on Twitter) is a contributing editor of the Manhattan Institute’s City Journal.